July 18, 2017

Audit finds city may have violated law with water deal

A special audit of the city of Jal found government officials in the southeastern New Mexico oil patch town gave “improper billings and adjustments” of more than $660,000 between 2008 and 2016.

Those billings may violate New Mexico’s anti-donation clause, State Auditor Tim Keller concluded, which bars local and state governments from making donations to private individuals.

The audit comes after NM Political Report and the Jal Recordreported last September that city officials gave a local rancher a $1.2 million discount on commercial water use between August 2012 and April of 2014. At the same time, the city raised water rates on other customers. Jal officials also continued selling industrial water to the the Beckham Ranch, Inc., for six months after a ban on industrial water sales went into effect.

The city also wrote a letter of support for Beckham’s application to sell 500 acre-feet of water nearly two years after the Office of the State Engineer cut off new water sales for industrial use from the Jal basin. The letter also came three months after the city passed its own resolution banning new water sales for industrial use.

“It is our understanding that the water was primarily intended to be sold for hydraulic fracturing related to oil and gas production,” the audit reads.

Although the city’s billing records showed the credits to the Beckham Ranch totaled $1.2 million, the audit found a meter reading error equalling $657,033, reducing the amount of credits to around $660,000.

In a statement, Keller said the city “seems to have violated a core tenant of good government—we don’t give away public resources to individuals for personal gain.”

The audit did not find any written documentation of the water deal.

“When we’re talking about a city giving away over a half a million dollars in water credits, a handshake deal doesn’t cut it,” Keller said. “Every deal made with public funds must have appropriate documentation so taxpayers know what they’re getting at and what they’re giving away in return.”

Jal City Manager Bob Gallagher declined to comment on the result of the special audit when reached by phone Monday afternoon, which he said wasn’t public yet. The city hired Gallagher as city manager in 2014, after the deal occurred.

Auditors also found that the city lacks proper policies “to create and retain evidence supporting billing and meter reading adjustments.” This, according to the audit, makes the city vulnerable to “fraud, waste and abuse.”

The city’s deal with the Beckham Ranch came in July 2012 after a meeting between former City Manager Curtis Shrader and Brad Beckham, the president of Beckham Ranch. According to the audit, which doesn’t identify Beckham by name, the city exchanged water credits for right of way access to Beckham’s property.

Beckham contended that Jal Mayor Cheryl Chance was also present at the meeting. Chance previously told NM Political Report that she was not part of the decisionmaking on the water deal.

Jal’s city council never voted on the arrangement.

The city granted Beckham the water credits in this instance, according to the audit, “because the customer provided unspecified contributions to the City of Jal,” including right of way access. As NM Political Report covered earlier, the city had already accessed water through Beckham Ranch for decades, according to Chance. Regardless, the city did not locate documentation that the water credits were exchanged for right of way access, according to the audit.

The audit also cites city officials telling auditors that Beckham provided water to the city in December 2013 for five days when a large water pump failure prevented the city from accessing its normal water source.

Still, the city didn’t provide any documentation to the auditor to show that the water credits were related to the Beckham Ranch’s actions during the water outage December 2013, according to the audit.

“Additionally, there was no information indicating that the value of the right-of-way access or any other benefit to be provided to the City was assessed in light of the reduced water charges,” the audit results read. “No other customers received similar treatment.”

The audit also found that the city also approved Beckham’s application to sell 500 acre feet of water for fracking purposes even after the State Engineer closed the Jal basin and the city made its own resolution banning the use of water for such purposes.

The state engineer closed the basin to new water sales and denied Beckham’s application in early 2013. The city passed a resolution banning new water sales for industrial use in September 2014. But, according to the audit, the city wrote a letter in December 2014 to the state engineer in “support of the 500 acre-feet applications consistent with the previous January 2013 agreement.”

The audit estimates the value of 500 acre-feet of water to sell for between $4 and $6 million.

Auditors also noted that Jal’s water supply, most of which comes from Texas and is also being tapped by that state’s much bigger city of Midland, is at risk from overpumping.

The city has since “developed new policies and procedures to strengthen internal controls over water billing practices” and auditors noted they “will review the adequacy of the steps the city has taken to address the shortfalls.”

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A handful of Democrats joined with Republicans at the Legislature on Friday to quash a bill that would have allowed the state to charge higher royalty rates on some oil and gas production. The first committee hearing for House Bill 398 turned into a showdown between New Mexico's influential oil industry and a newly elected Democratic land commissioner who came to office pledging to collect a greater share of revenue from oil produced on the millions of acres her office controls.

State Auditor Tim Keller recently designated the City of Jal for a special audit on the city’s water billing issues. The move comes two months after Keller’s office opened a case into an arrangement where the city in the southeastern New Mexico oil patch gave a local ranch a discount on utility water worth $1.2 million over a 25-month period between 2012 and 2014.

State Auditor Tim Keller recently designated the City of Jal for a special audit on the city’s water billing issues. The move comes two months after Keller’s office opened a case into an arrangement where the city in the southeastern New Mexico oil patch gave a local ranch a discount on utility water worth $1.2 million over a 25-month period between 2012 and 2014.

When you're driving at night through Counselor, N.M., on U.S. 550 the horizon takes on a dusky illumination, almost like daylight, Samuel Sage said during a Monday news conference in Santa Fe. Bright light flares from natural gas being burned off as part of oil and gas production, which has become increasingly common in that area of Northwestern New Mexico, particularly since 2013, said Sage, a member of the Navajo Nation's Counselor Chapter House.

A visitor heading down NM-128 to Jal would be forgiven for believing there were more people driving pickups and equipment trucks on the congested state highway than living in the small oil patch town of just over 2,100 people. Jal is an old ranching community — JAL was the brand of the John A. Lynch herd, brought to the area by settlers in the early 1800s — but today, oil is its economic engine.

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The state House of Representatives approved a $7 billion budget on Thursday, sending to the Senate a plan for the next fiscal year that would provide nearly half a billion dollars in additional funds for public schools but which Republicans say amounts to an outsize increase in government spending.

Joey Peters has been a journalist for nearly a decade. Most recently, his reporting in New Mexico on closed government policies earned several accolades. Peters has also worked as a reporter in Washington DC and the Twin Cities. Contact him by phone at (505) 226-3197.